Claims for Negligence? Duty to Defend Triggered

Michael S. Levine | Hunton Andrews Kurth | June 19, 2019

On June 17, 2019, the First Circuit held that an insurer’s duty to defend was triggered because the underlying complaint set forth claims that required a showing of intent as well as claims that sought recovery for conduct that “fits comfortably within the definition of an ‘accident.’” In Zurich American Ins. Co v. Electricity Maine, LLC, Zurich sought declaratory judgment that, under a D&O policy, it had no duty to defend the insured, Electricity Maine, an electrical utility company being sued in the underlying class action. Zurich argued it had no duty to defend because the underlying complaint failed to allege that Electricity Maine engaged in conduct that qualified as an “occurrence” or that caused “bodily injury” under the terms of the policy. The First Circuit disagreed.

The D&O policy stated that Zurich “has a duty to defend Electricity Maine against any lawsuit that seeks damages for ‘bodily injury’ caused by an ‘occurrence.’” The policy defined an “occurrence” as “an accident . . .” and under Maine law an accident is “commonly understood to mean . . . an event that takes place without one’s forethought or expectation . . . .” The Court held that, because the underlying complaint asserted claims for negligence and negligent misrepresentation, in addition to intentional torts, the conduct upon which recovery was sought fell within the definition of an “accident” and therefore qualified as an “occurrence” triggering the duty to defend. Second, the Court held that, although the underlying complaint did not allege that Electricity Maine’s conduct caused “bodily injury,” the complaint did not need to do so to fall within the risk insured and trigger a duty to defend. Instead, because the alleged conduct could result in bodily injury due to emotional distress, the allegations fell within the risk insured and Zurich has a duty to defend.

Ohio Supreme Court Bucks Recent Trend and Holds No Coverage for Construction Defects Under Commercial General Liability Policy

Heather Howell Wright | Bradley | December 2018

The insurance coverage analysis under a commercial general liability (“CGL”) insurance policy begins with the “insuring agreement.” The standard CGL policy provides coverage for “those sums that the insured becomes legally obligated to pay as damages because of ‘bodily injury’ or ‘property damage.’” The standard CGL policy further provides that the property damage must be caused by an “occurrence,” which is in turn defined as “an accident.” Traditionally, courts had held that a construction defect was not an “accident,” and thus losses associated with such defects or faulty workmanship were not covered under a CGL policy. However, the recent trend has been for courts to find that construction defects or faulty workmanship do satisfy the “occurrence” and “property damage” requirements for CGL coverage. Yet, a recent decision out of Ohio bucks this trend of finding that claims of faulty workmanship may be covered under a CGL policy.

In Ohio N. Univ. v. Charles Constr. Servs. Inc., the Ohio Supreme Court recently held that construction defects do not constitute an occurrence under a standard-form CGL policy, and that an insurer has no obligation to defend or indemnify claims for defective work. The underlying claim in this case involved a contract between Ohio Northern University (“Owner”) and Charles Construction Services, Inc. (“Contractor”) to build a new conference center and hotel. After the project was complete, Owner discovered extensive water damage and structural defects. Owner filed suit against Contractor, which in turn filed third-party claims against its subcontractors. Contractor tendered the defense to its insurer, Cincinnati Insurance Company (“Cincinnati”), which intervened and sought a declaration that it had no duty to defend or indemnify Contractor.

In the trial court, Cincinnati filed a motion for summary judgment on the declaratory judgment claim and asserted that claims for defective workmanship are not claims for “property damage” caused by an “occurrence.” The trial court granted Cincinnati’s motion for summary judgment, finding there was no duty to defend or indemnify for faulty workmanship.

On appeal, the Ohio Supreme Court considered the CGL policy definition of “occurrence” as an “accident including continuous or repeated exposure to substantially the same general harmful conditions.” The court opined that an accident was unexpected or unintended – involving fortuity. Because a subcontractor’s faulty work is not fortuitous, it could not satisfy the “occurrence” requirement in the CGL.

Importantly, the Ohio Supreme Court recognized that its decision conflicted with decisions in other states as well as the trend of finding coverage for construction defects – but the court explained that “[r]egardless of any trend in the law,” it was required to interpret the plain and unambiguous language of the policy. The court also noted that the Arkansas legislature had enacted a statute requiring that a CGL policy sold in Arkansas must define “occurrence” as including “property damage resulting from improper workmanship.” The Ohio N. Univ. Court noted that the Ohio General Assembly could pass similar legislation in response to the decision.

While the recent trend across the country has been for courts to find that construction defects may be covered under a CGL policy, this case may indicate a pendulum swing in the other direction. Even if it proves to be an outlier, it highlights the importance of knowing which law will apply to the interpretation of insurance policies, because the law can vary significantly from one jurisdiction to another.

Wildfire Considered One Occurrence Despite Damaging Numerous Properties

Christina Phillips | Property Insurance Coverage Law Blog | November 29, 2018

A recent decision by the Supreme Court of Wisconsin1 might predict how other courts would analyze coverage under commercial general liability insurance policies for wildfires. In May 2013, a fire broke out on forest land owned by Lyme St. Croix Forest Company. The fire burned nearly 7,500 acres over the course of three days and damaged real and personal property owned by various individuals and businesses.

The fire was alleged to have begun within a piece of logging equipment owned by Ray Duerr Logging, LLC (“Duerr”). At the time of the fire, Duerr was insured by Secura under a commercial general liability policy with a $2 million aggregate limitation. The policy also contained a logging endorsement, the per-occurrence limit was reduced to $500,000 for property damage due to fire arising from logging or lumbering operations. Secura believed that the $500,000 policy limit applied, rather than the $2 million aggregate limit and filed a declaratory judgment action.

The Supreme Court of Wisconsin was presented with determining whether the fire was a single occurrence for purposes of the CGL policy, or whether there was a new occurrence each time the fire crossed a property line. The court began by looking at the policy language, which defined “occurrence” as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” The court then looked to the “cause theory” which provides “where a single uninterrupted cause results in all of the injuries and damage, there is but one ‘accident’ or ‘occurrence.’ ” If the cause and results are so simultaneous or closely linked in time and space as to be considered by the average person as one event, then only a single event has taken place.

In concluding that the fire was a single occurrence, the court noted that the fire burned continuously for three uninterrupted days in a discrete area caused by a single precipitating event. The court believed that the average person would consider this one event regardless of how many properties lines the fire crossed. In that regard, the Supreme Court of Wisconsin believed that the number of properties damaged by the fire was irrelevant – whether one person, or multiple persons owned the 7,500 acres did not determine the number of occurrences.

Additionally, the Wisconsin Supreme Court disagreed with the court of appeals determination that there was an occurrence each time the fire – fueled and expanded by the consumption of new materials – spread to a new piece of real property and caused damage. The Wisconsin Supreme Court held that such a conclusion would result in an unfathomably large number of occurrences, an interpretation which would cause an unreasonable result under the policy. As such, the Wisconsin Supreme Court concluded there was a single occurrence, subject to the $500,000 policy limit.
1 Secura Ins. v. Lyme St. Croix Forest Co., LLC, 918 N.W. 2d 885 (WI. Oct. 30, 2018).

“An” Versus “Any”: When One Word Makes a Profound Difference in an Insurance Contract

Jeff Collins | Jones, Skelton & Hochuli PLC |  November 14, 2018

A fundamental principle of insurance is that it provides a safety net for fortuitous events which may create liability against the insured. Equally fundamental is the principle that liability insurance policies do not insure foreseen, expected or intentional acts or omissions of an insured. With regard to a commercial general liability policy, these fundamentals are enshrined in the requirement of an “occurrence,” as used in the Insuring Agreement and defined by the policy, and in the exclusion for “expected or intended injury.” However, these principles are not always satisfied.

Unfortunately for insurers, there may be certain circumstances based upon specific policy wording in which there is coverage for an insured-employer for its vicarious liability arising out of the intentional and excluded conduct of its employees. This analysis, in Arizona and elsewhere, centers around a single word in the “expected or intended injury” exclusion. The standard exclusion states:

Expected Or Intended Injury

“Bodily injury” or “property damage” expected or intended from the standpoint of [the] [an] [any] insured. This exclusion does not apply to “bodily injury” resulting from use of reasonable force to protect persons or property.

The bracketed words [the] [an] [any] have been assigned significant importance in the case law, and are also at issue in cases examining other liability exclusions. Depending on which word is used in the exclusion, an employer-insured may be covered for the vicarious liability of an employee who acted with intent to cause “bodily injury.” This includes cases of clear intent to cause physical harm constituting assault, and this result is contrary to the fundamental insurance principle of protecting against only fortuitous risks.

The Arizona Court of Appeals addressed this issue in American Family Mutual Insurance Company v. White, 204 Ariz. 500, 65 P.3d 449 (App. 2003). In White, American Family issued a homeowners policy to its insureds, whose son was indicted on two counts of aggravated assault after assaulting the plaintiff.

In the civil litigation, the plaintiff alleged that the insureds were liable for negligent supervision of their son. American Family denied coverage for the claims based upon a “violation of law” exclusion, which excluded bodily injury “arising out of . . . violation of any criminal law for which any insured is convicted . . . .” (emphasis added). In White, the appellant argued that the severability clause mandates that an insurer determine the applicability of exclusionary clauses separately as to any insured asserting coverage. This clause states, in part, that the rights or duties assigned in the coverage apply “separately to each insured against whom a claim is made or ‘suit’ ‘is brought.” As such, the appellant claimed that the exclusion did not apply to the negligent supervision claim against the insureds because only their son was convicted of violating a criminal law.

The court held that the phrase “any insured” in an exclusionary clause means something more than the phrase “an insured.” For purposes of this analysis, “the” can be similarly treated as “an.” Specifically, the distinction is that [an] refers to one object, and [any] refers to one or more objects of certain type. Therefore, the court held that the phrase “any insured” in an exclusion bars coverage for any claim attributable to the excludable acts of any insured, even if the policy contains a severability clause. Had the phrase read “an insured,” the excludable conduct would had to have been attributable to each insured separately.

Arizona courts have not yet addressed this distinction in the context of the “expected or intended” exclusion in a vicarious liability situation. However, there is no indication that an Arizona appellate court would not apply the same rationale adopted in White to such an exclusion. This leads to the illogical conclusion that an insurer would have to prove that the employer-insured also acted intentionally to preclude coverage for a purely vicarious liability claim. Because the underlying merits of the vicarious liability claim do not rely upon proof of the employer’s mental state, that “intent” will never be at issue and there will always be coverage for the vicarious liability arising out of the non-fortuitous and intentional acts of an employee. Although the separate analysis of each insured’s state of mind may be logical in the context of other non-vicarious claims that require an analysis of the insured-employer’s separate actions (negligent hiring, supervision, retention or entrustment), it is not so in the context of a purely vicarious liability claim.

There is some indication from the White decision that common law may support application of the exclusion to exclude vicarious liability claims against the insured-employer. After conducting its policy-based analysis, the court held:

We also conclude that the negligent supervision claim against the Wildes is excluded because it derives from the claim against Travis, which is excluded. See Behrens v. Aetna Life & CAS., 153 Ariz. 301, 736 P.2d at 385 (1987) (finding that a claim for negligent entrustment or supervision could not exist apart from the excluded negligent operation of a boat).

White, 204 Ariz. at 508. (emphasis added). Based upon this language, the court left open the possibility of a similar challenge to cases involving vicarious liability claims arising out of excluded conduct. That would appear to be an uphill battle given that the primary holding of the court was based upon specific policy language (“any” versus “an”) and well-settled analysis in cases across the country. Also, the Behrens’ decision, cited in White, did not involve an analysis of the “any” versus “an/the” issue in conjunction with the severability clause.

Aside from the exclusion in addressing intentional acts, there is the potential coverage argument that the “bodily injury” was not caused by an “occurrence,” i.e. an accident. If the bodily injury was caused by the intentional acts of an employee, then it was not accidental. Therefore, it should be a logical extension that any claims arising out of that conduct, including vicarious claims, should not be covered as not qualifying for coverage under the Insuring Agreement. This analysis is independent of the applicability of the exclusion addressed above and was addressed by the United States District Court, District of Arizona, in National Fire Insurance Company of Hartford v. Lewis, 212 WL 6552596 (D. Ariz. 2012).

In that matter, National Fire issued a business owners’ liability insurance policy to a medical practice. The practice and individual physicians were sued based on allegations that a physician inappropriately viewed and touched patients under the guise of performing legitimate medical treatment, allegedly constituting assault and battery. Further, the practice and other physicians were allegedly vicariously liable for that tortious conduct. The court noted that none of the parties contended that the defendants intended or expected the tortfeasor doctor to do what he did. Thus, while the tortfeasor doctor may have intended his own actions, from the perspective of the other defendants, the actions were “undesigned, sudden and unexpected events” that met the definition of an accident. The court determined that “consequently, there has been an ‘occurrence’ under the terms of the business owner policies,” and the vicarious liability claim qualified for coverage under the Insuring Agreement.

National Fire is a District Court decision, and that portion of the court’s opinion is not premised upon any well-settled Arizona law interpreting whether an “occurrence” could be attributed to an insured-employer in a vicarious liability claim arising out of the intentional conduct of an employee. Thus, there is an argument that this issue remains unsettled in Arizona, and it should be examined by an Arizona state appellate court. Aside from being a co-conspirator, it is difficult to imagine a factual scenario in which an employer-insured intends for its employee to intentionally cause another harm so that the vicarious claim would be considered non-accidental and not covered.

The practical effect of White and National Fire is that coverage may be afforded under a liability policy for clearly non-accidental conduct. Although the “occurrence” analysis arises out of common law largely beyond an insurer’s control, an insurer can control this risk by changing one word in the “expected or intended injury” exclusion. Using “any” as opposed to “an” or “the” excludes all claims arising out of excluded conduct, and fulfills the insurance principle of protection only against fortuitous events.

Despite Modern Trend, Ohio Supreme Court Does Not Reconsider Prior Precedent – Finds Inadvertant Defective Work by Subcontractor can Never be a Fortuitous ‘Occurrence’

Clifford Shapiro | Barnes & Thornburg LLP | October 15, 2018

The Ohio Supreme Court ruled on Oct. 9, 2018, that property damage caused by a subcontractor’s faulty workmanship can never be an accidental “occurrence” within the meaning of the Commercial General Liability (CGL) insurance policy, and is therefore not covered. Ohio Northern University v. Charles Construction Services Inc., Case No. 2017-0514 (2018). In reaching this conclusion, Ohio’s highest court followed its own precedent instead of applying the reasoning used by the vast majority of courts that have reached the opposite conclusion in recent years.

Ohio Northern University (ONU) hired Charles Construction Services to oversee construction of an $8 million University Inn and Conference Center. Charles Construction obtained a general liability policy from Cincinnati Insurance Company. After the project was completed, the University discovered extensive water infiltration and other damage to the building. The University sued Charles Construction for breach of contract, and Charles Services filed third-party claims against several subcontractors. Cincinnati initially agreed to defend Charles Construction in the litigation under a reservation of its rights, and then obtained a trial court ruling finding that it had no duty to defend. The Appellate Court reversed, and the Ohio Supreme Court agreed to review the Appellate Court’s decision at Cincinnati’s request.

The Ohio Supreme Court reversed, finding that Cincinnati owed no duty to defend or to indemnify Charles Construction. The analysis in the decision is based entirely on the court’s 2012 decision in Westfield Ins. Co. v. Custom Agri Sys., Inc., 133 Ohio St.3d 476, 979 N.E.2d 269 (2012). In that case, the court held that “property damage caused by a contractor’s own faulty work” is not “fortuitous” and therefore is not an accidental “occurrence.”

The court viewed the issue in Charles Construction to be “nearly identical,” and therefore applied its reasoning in Custom Agri. Using that analysis, the court held that: “Property damage caused by a subcontractor’s faulty work is not an ‘occurrence’ under a CGL policy because it cannot be deemed fortuitous. Hence, the insurer is not required to defend the CGL policy holder against suit by the property owner or indemnify the insured against any damage caused by the insured’s subcontractor.”

The Ohio Supreme Court acknowledged that its decision is contrary to several recent decisions. Those decisions include the Tenth Circuit’s decision in Black & Veatch Corp. v. Aspen Insurance (UK) Ltd., 882 F.3d 952 (10th Cir. 2018) (predicting that the highest New York court would hold that resulting damage from faulty subcontractor work constitutes an “occurrence”), the New Jersey Supreme Court decision that changed New Jersey law in Cypress Point v. Adria Towers,2016 WL 4131662 (2016) (holding that the term “accident” in the CGL policy encompasses unintended and unexpected harm caused by negligent conduct, and that consequential harm caused by negligent work is an accidental “occurrence”), and the Iowa Supreme Court decision that changed Iowa law in National Surety Corp. v. Westlake Investments, 880 N.W.2d 724 (Iowa 2016) (discussing in detail the history and evolution of the CGL policy to change and clarify Iowa law by holding that “defective workmanship by an insured’s subcontractor may constitute an occurrence under the modern standard-form CGL policy containing a subcontractor exception to the ‘your work’ exclusion.”)

The decision issued by Ohio’s highest court does not reconsider the court’s reasoning in Custom Agri or address the legal analysis that is now used by most other courts that have carefully considered (and, in several cases, reconsidered) this issue in recent years. Instead, the Ohio Supreme Court applied its prior decision in Custom Agri without discussion of the important changes to the policy terms that most courts have concluded require a different conclusion. According to the court: “Regardless of any trend in the law, we must look to the plain and ordinary meaning of the language used in the CGL policy before us.” The court added: “When the language of a written contract is clear, we may look no further than the writing itself to find the intent of the parties.”

Contrary to the court’s explanation, its analysis in Custom Agri, and now Charles Construction, actually fails to apply the terms of the modern day CGL insurance policy. Instead, these decisions apply an outdated judicial gloss not found in the insurance policy itself to conclude that inadvertent faulty workmanship can never be “fortuitous” or “accidental.” This reasoning is rooted in analysis that was used by courts and commentators before the CGL policy terms were materially changed, including in 1986. Those changes modified the exclusions to clarify that the CGL policy provides coverage for certain kinds of property damage caused by inadvertent faulty workmanship. In other words, the coverage grant in the modern day CGL policy specifically anticipates that coverage can exist for property damage caused the accidental “occurrence” of faulty workmanship. The CGL policy exclusions then define and narrow the scope of the insurance coverage that is actually provided when property damage is caused by faulty workmanship. In particular, due to the “subcontractor exception” in the “your work” exclusion, the modern day CGL policy specifically anticipates and provides insurance coverage for a general contractor when property damage is caused by the faulty work of its subcontractors. This is especially true where (as in Charles Construction) the property damage arises after operations are complete and the damage is to something other than the subcontractor’s defective work itself.

The Ohio Supreme Court’s decision is contrary to the clear trend in the law on this issue, a trend that is based on more careful analysis of the current CGL policy terms. It is most unfortunate that the Ohio Supreme Court elected not to use the Charles Construction case as an opportunity to reconsider and to correct the faulty reasoning and analysis in the court’s 2012 Custom Agri decision. For more analysis of the important “occurrence” issue, please see the 50 state survey of case law discussing this issue that was prepared by the Barnes & Thornburg Construction Law Practice Group. It can be accessed here.